If the U.S. interest rate is 5% and the interest rate in Germany is 2%, and the euro is expected to appreciate by 2% over the next year, then investors would:
A) sell dollars in the spot market.
B) buy euros.
C) seek to invest in the United States.
D) seek to invest in Germany.

Question

Quizplus · Accepted Answer

Given the higher interest rate in the U.S. (5%) compared to Germany (2%), investors would seek higher returns, thus they would be more inclined to invest in the United States. The expected appreciation of the euro (2%) does not offset the higher interest rate differential.

If the US Interest Rate Is 5% and the Interest Rate in Rate